Australia needs a better system to monitor how many homes are being sold to foreign investors

Foreign investors are estimated to have bought between 35,000 and 60,000 Australian homes in the 2015/16 financial year, accounting for anywhere between 7 to 13% of total housing turnover during that period.

And, as a result of the increased activity — far larger than the levels seen in the past — foreign investors could own as much as 4%, or 450,000 dwellings, of Australia’s total housing stock.

However, no one can say with any certainty just how large or small it really is — a quandary of sorts given Australia’s housing market is currently valued at $6.7 trillion, according to data released by the Australian Bureau of Statistics.

That’s the finding of new research from ANZ Bank which, in an excellent note released today, points out the difficulty in trying to determine just how large foreign involvement in the housing market is, given there is no centralised body to monitor transaction levels.

Daniel Gradwell, senior economist at ANZ, has taken it upon himself to evaluate what impact foreign investment has had on house prices and construction over the past few years.

“We are often asked about the rules around foreign investment and the impact that such investors have on the Australian housing market,” he says. “While concrete data are hard to come by, we are able to combine existing data with informed assumptions to reveal some useful insights.”

Starting with data from Australia’s Foreign Investment Review Board (FIRB), Gradwell says that, based on approvals data at least, it’s clear that foreign demand for Australian property has increased rapidly in recent years, especially among Chinese nationals.

“The FIRB data tell us that in 2015-16, 40,100 property purchases by foreign buyers were approved, valued at $72.4 billion,” he says.

“Each FIRB approval can be for more than one property, so the value figure is particularly important. Foreign purchases have risen sharply in recent years, led by Chinese purchasers, with the value of approvals granted in 2015-16 three-and-a-half times greater than just five years ago.”

This chart from ANZ puts that statistic into visual form:

Source: ANZ

However, while we know that approvals have increased rapidly in recent years, the tricky part, says Gradwell, is just how many of those approvals led to actual purchases.

“The FIRB data tells us about approvals, not actual purchases,” he says.

“So, to calculate actual foreign buying, we need to make some assumptions about the rate at which approvals translate into purchases.

“The FIRB approved $72.4bn of sales to foreign purchasers in 2015-16. To convert this into the number of transactions, we lean on recent estimates from the RBA, which noted that foreign buyers are purchasing around 10-15% of all new housing and around 25% of new apartments.”

Using the assumption that 30-50% of these approvals resulted in a property purchase, Gradwell says that foreigners likely bought anywhere from $22–35 billion worth of Australian property in 2015-16, or 35,000–60,000 dwellings nationwide based on the median property price from CoreLogic.

Breaking down that figure further, Gradwell says that most foreign activity was likely in the new housing market, estimating that foreign buyers purchased between 30,000–50,000 new dwellings in 2015-16, representing 15–25% of new dwellings built that year.

“In flow terms, therefore, the impact of foreign buyers on the new housing segment could be sizeable,” Gradwell says.

Based on his estimates, he says that the vast bulk of that activity in the new housing market was concentrated in Victoria, Australia’s fastest growing state in terms of population growth.

“On our estimates, most of this foreign activity in new housing in 2015-16 seems to have been in Victoria,” says Gradwell.

“We estimate that foreigners purchased 13,000–20,000 new dwellings in Victoria, representing 25–35% of total new builds in the year. The market share seems to be higher in Queensland (25–45% of new dwellings) and lower in New South Wales (15–20%).”

Gradwell says that given that level of involvement, this likely made a substantial contribution to Australia’s residential building boom seen in recent years, something that few will argue has helped to boost employment levels in the construction industry and placed downside pressure on prices, especially for high density housing.

“The sizeable foreign-buyer share of newly-constructed housing implies that foreign demand has been an important contributor to Australia’s recent construction boom,” he says.

However, while others blame increased foreign activity as one reason why dwelling prices in Australia’s southeastern capitals have soared in recent years, Gradwell says it may not be as influential a factor as some currently suggest.

“The relatively lower share of total market activity suggests that foreign buyers have not been the primary driver of the price growth in recent years,” he says, adding that this “is not to say foreign buying has had no impact on prices”.

With interest rates at record lows and population growth strong, it’s debatable just how much of an influence foreign activity has had in pushing up prices.

However, that’s perhaps the most striking point Gradwell makes in his analysis.

No one can say with any certainty as to what impact increased foreign investment has had on the housing market, be it purchase levels or price impact, especially on a more granular geographic level.

We simply have no concrete data, let alone a standalone body, to monitor activity beyond the approval process.

Gradwell says it would be helpful if Australia’s state governments would be more forthcoming with disclosing that kind of information.

“We note that Revenue New South Wales has several times this year released data on the number and value of foreign purchasers that have been subjected to stamp duty surcharges,” he says.

“It would be helpful if other state governments released their suite of data on foreign buyers, which would assist in more concrete analysis around the impact of foreigners on Australia’s housing market.”

Given the importance of Australia’s housing market on the broader Australian economy, along with social issues such as housing affordability for those looking to enter the market, having more rigid data set seems like a more than sensible starting point to help guide policy decisions in the future.